September 16, 2024 • 35 mins
Index funds are finding fans in far-flung places, with more investors outside the United States buying into the benefits of passive, low-cost stock baskets. Asia and Australia have emerged as two of indexing’s most promising growth markets, powered by the allure of fee compression, market appreciation, and a broad array of product offerings. Duncan Burns, Vanguard Australia’s Head of Investments, weighs in on active-versus-passive strategies with Tiger Money co-hosts David Ingles and Rebecca Sin, and talks about why he believes indexing is headed for broader investor acceptance in the Asia-Pacific region.
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Speaker 1 (00:00):
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Speaker 2 (00:17):
Good morning, good afternoon, good evening, and good night's wherever
in this vast little blue planets you're joining us from
Welcome to Tiger Money, a Bloomberg podcast about all things
investing with a twist on exchange traded funds in the
Asia Pacific and beyond. I'm David Ingless, Chief Markets Editor
for the Asia Pacific at Bloomberg TV.
Speaker 3 (00:35):
I'm Alted, a.
Speaker 2 (00:35):
Host of The China Show, and Michael pilot Is.
Speaker 4 (00:38):
I'm Rebeccason, head of Asia Pacific ETF Research at Bloomberg Intelligence.
This conversation is strictly non confidential. If you like what
you hear, don't forget to subscribe, like and share. We've
all heard about the rise of indexing, but today we're
going to discuss whether index funds and their actively managed
counterparts can sit at the same table without eating each
other's lunch. A few active managers outperform their benchmark so
(01:03):
is there a room on the playing field for both?
And as strange as it sounds, how much to active
and passive fund managers need each other. Let's bring in
Duncan Burns, head of investment management and equity indexing for
Asia Pacific at Vanguard Australia, because more than twenty years
of trading and investment management experience have Tanum a thing
or two. Besides being an investor, he's also an added cycler. Duncan,
(01:25):
Welcome to Tiger Money.
Speaker 3 (01:27):
Pleasure to be here, David Bega, I've been looking forward.
Speaker 2 (01:29):
To this, Yeah, Duncan twenty years, so you'd be in
probably the perfect position to tell us how things have
evolved and where things are probably headed. Let me just
start by asking what have you guys been busy with?
What's taking up most of your mind space?
Speaker 5 (01:43):
Yes, maybe I'll just touch on what Vanguard's doing in
the region here, and you're looking at Vanguard by the
numbers globally, we're looking after fourteen trillion auarsie dollars on
behalf of fifty plus million mom and dad investors. And
while I've been a Vanguard for some ten years, I
(02:03):
still find those figures amazing. But We absolutely never lose
sight of the fact that that's all client money and
we're just looking after it for him. Zeroing in on
our APAC operation, we're looking after a trillion Ausie dollars
across fourteen markets. Here and Melbourne, Australia is Vanguard's APAC hub.
We have two other hubs London looking after Europe, and
(02:27):
we've got Malvern, Pennsylvania just outside Philadelphia looking after the Americas.
And again our Aussie based investment team. We got about
fifty five strong portfolio managers, traders, risk analysts and economists
and they are driving Vanguard's money management operation and some
(02:47):
thought leadership here in the region. And in terms of
what we're up to, we're largely index focused in the region.
We're bringing that to market through a personal investor offering,
and that's retail through an advisor offering. And our newest
launch is Vanguard Super And a lot of clients think
(03:09):
of us as just an index manager, but as we
kick off here, I want to share about three quarters
of Vanguard's AM is in the index space, but roughly
a quarter is in the active space, so we don't
want to be thought of as just an index manager.
We like to think of ourselves as a low cost manager.
Speaker 4 (03:27):
So speaking of low costs, Vanguard is known to be
one of the cheapest ETF and passive provider. For instance,
your average expense ratio is only eighteen basis points compared
to Blackrock iheres which is thirty two. So you guys
are definitely one of the cheapest in terms of you know,
you mentioned active and passive. We've heard a lot about
active not performing. In one of our recent podcasts, we
(03:48):
had Mark Mobius and Dan Draper, who's the CEO of
S and P five hundred, and he said that ninety
percent of fund managers don't beat their benchmark. And so
now when we talk about the rise of indexing, Bloomberg
Intelligence has a prediction that ETFs will reach thirty five
trillion US dollars by twenty thirty five. And so can
passive and active really coexist? And what are your thoughts
(04:09):
around the rise of indexing?
Speaker 3 (04:11):
I love that question, Rebecca.
Speaker 5 (04:13):
Before I jump to it, perhaps just defining a few
terms here for the listeners as Vanguard sees them indexing.
If we think of that as strategies that are designed
to match a benchmark and not beat it, and really
most powerful when we're targeting a total market portfolio. Indexing
(04:33):
is synonymous with passive, So not a fan of the
name passive. Hopefully that's the only time I say it
here during the session, but you may hear those terms
used interchangeably. That's index and passive and active, so active investing.
I think of that as really anyone who's looking to
outperform the market, and think about stock selection or market
(04:57):
timing based approaches, jumping in and out of the market,
picking individual stocks. And lastly ETF or exchange traded fund
and I think of those as kind of the offspring
of index funds or index funds two point zero and
ETFs are a rapper.
Speaker 3 (05:14):
You can put anything in them.
Speaker 5 (05:15):
These days, but the vast majority of AM and you
know that's really focused on total market ETFs. With that understanding,
I'll circle around to your question, Rebecca, why does Vanguard
believe in in indexing?
Speaker 3 (05:29):
Is there room for active and indexing?
Speaker 5 (05:33):
And I'll say there absolutely is room for both, and
I'd love to drill into cost shortly, but the key
is getting costs right on both sides of that. But
you know, as we look at the landscape today and
we look at the index revolution as it's taking shape
around the world. It's moving at different paces, and US
(05:53):
is leading the charge. They're just approaching fifty percent passive share,
so it's fifty percent passive, fifty percent active in funds
and ETFs. Europe see somewhere in the range of thirty
to forty percent, and Asia pac In Australia we're bringing
up the end.
Speaker 3 (06:09):
Of that train.
Speaker 5 (06:10):
We're not even through twenty five percent here in Australia.
So index revolution absolutely playing out, but we've got a
lot more growth ahead of us here in Australia and
in Asia in particular. What would you both say if
I told you that all the investors are throwing away
billions of dollars a year, and this isn't something that's
(06:31):
just started. It's been going on for about ten years
or so. You know, those are some eye popping numbers.
But the fact is a lot of investors are paying
for something that simply cannot be delivered. And as I
look at the active landscape, but a lot of investors
paying for the promise of active outperformance. And as we've
(06:53):
done some studies and looked at things here in ows
recently across a few different aspects of the market. Love
to delve into that and kind of the why behind
indexing working. But yeah, the index revolution is playing out
globally and locally, and what we see here as a
(07:13):
trend is the smart money and the serious money is
moving the core of their portfolio over to that index
total market exposure. And in terms of what's behind that shift,
if there's one key driver, it comes down to performance,
and there's a performance edge of index overactive.
Speaker 4 (07:33):
I think one of the things that's unique about Asia
is the fragmentation that you have. So to your point,
you know, Australian investors are very different to Chinese investors,
and one of the things that's unique about the Australian
market is you're the only region that has banned retro
session fees, which are rebates, and I think that's why
you've been able to be so successful in Australia. So
for instance, in other regions, people are still paying distributors
(07:55):
fees to sell a product. And so you mentioned earlier
that you have the Australian can tell us a little
bit more about this and why you guys decided to
get into this.
Speaker 5 (08:05):
Yeah, so our latest launch and a big focus here
for our Australian ra Pac operation has been moving into
the Australian superannuation market and that's the retirement scheme here locally,
and the key driver here or the point on that
business is Vanguard wants to be close to the client.
Speaker 3 (08:24):
We are focused on retail clients.
Speaker 5 (08:27):
And over the years we've probably moved a little bit
out of institutional to really point at that sector of
the market. And Vanguard's mission is to take a stand
for all investors, treat them fairly and give them the
best chance for investment success. And as we move into
the super space, we're looking to bring the power of
indexing into super and really drive some fantastic client outcomes
(08:50):
off the back of that.
Speaker 2 (08:53):
Okay, give us a sense of the skill of your business.
And you mentioned you guys the APAs in Melbourne or Melbourne.
My Aussie friends are going to crucifyd me for that.
But you know, I tried give us a scale of
your operation there relative to the market and where you
want it to be in a couple of years.
Speaker 5 (09:14):
So as we look at at Vanguard's footprint in Australia
and in the Asia Pac region, we very much run
our investment book on a global basis. So I mentioned
those three hubs before, we're passing the book and passing
the trade amongst those three offices.
Speaker 3 (09:31):
So we're we.
Speaker 5 (09:32):
Are in every major market cross equities, bonds, FX and futures,
and we're trading twenty four hours a day, five days
a week. And we use that hubstructure again to reach
into local markets.
Speaker 3 (09:47):
Gives us better.
Speaker 5 (09:47):
Control and helps us lower cost, cut out the middleman.
We do a lot of self trading and as we
zoom in on our APAC operation and what we're looking
after here off our Melbourne desk, fourteen markets, Japan is
the number one. We've got Alls, Hong Kong, China, India
in there as some of the other biggies, and we're
(10:10):
looking after global vanguards investments into that basket of fourteen countries.
Speaker 4 (10:16):
So if we look at the product offering that you
guys have globally, you mentioned the three hubs in Australia,
Europe as well as in the US. Do you find
the product offering an investor appetite different across the region?
Speaker 5 (10:31):
There are some slight nuances, and again I might go
back to the index revolution and the way we see
that playing out our offering in our lineup does look
quite similar around the globe, and we do see investors
gravitating to it early in the US, probably Europe close
(10:52):
behind that, and Australia and Asia bringing up the risk.
We do see the index revolution playing out in a
big way, and hopefully by shining a bit of a
spotlight on that today and some of the benefits around
the power of indexing, we can accelerate that. And Vanguard's
bringing that to market through managed funds and through ETFs
(11:14):
would be the core products that we're putting out to market.
Speaker 2 (11:19):
Yeah, you mentioned a few figures earlier on which really
I guess in many ways underscore the potential for the region.
I think you mentioned twenty five percent for example, versus
say a fifty percent let's just call it penetration rate
of passive in the US. And you know, Rebecca brought
up a very good point as well on there's just
different distribution, say schemes across the region. But I guess
(11:42):
my big picture question to you is is there a
sense of inevitability that we are headed, you know, agnostic
to what markets you're operating, we are headed in that
direction of just more money going into index indexing and
passive and what do you think the future is for
(12:02):
active I'm just wondering where you think we go longer
term and if there's anything we can do with the
change the trajectory.
Speaker 5 (12:08):
You know, I think the key driver behind that, David
has got to be performance, and there are active managers
out there that can and do beat the market. You
have a few brilliant investors buffet, maybe David Swenson at
the Ale Endowment, the late David Swinson, or throw Jim
Simon's over at Renaissance Technologies in that bucket as well,
(12:32):
but they are extreme outliers. And it's not that active
can outperform, it's that on average active can't outperform.
Speaker 3 (12:42):
My friends over at S and P.
Speaker 5 (12:43):
They put out a fantastic piece every year called SPIVA,
which stands for S and P Index versus Active And
what they do with that piece of work is they
compare active managers versus their chosen or their closest benchmark
and the punchline of their work. What really sits with
me is that over the long term, over five ten
twenty year periods, about eighty percent of active managers underperform
(13:08):
their chosen benchmarks. After cost, and I'm a numbers guy, David,
and I bring it back to performance and think about
those probabilities, and think about an investor looking to make
the decision active, passive, or a bit of both. If
they are steering hard towards active, they got to think, hey,
(13:29):
eighty percent, those are my odds of underperforming versus twenty percent.
I'm much smaller twenty percent of outperforming. So I think
that that sticks with me. And I also want to
call out persistence is an important thing to look at
there too. You say, hey, I'm not going to pick
any of those bad managers. I'll just pick some of
the good ones. Are the great ones in that twenty percent.
(13:50):
And as S and P looks at that in their scorecard,
there's a whole lot of turnover in that twenty percent,
and the quantity or the amount of active managers that
can outperform and outperform on a repeated basis, there's something
in the order of two to three percent. So yeah, again,
bringing it back to the odds and where the average
(14:11):
investors should be starting their portfolio and building the core
of their portfolio, indexing just makes a lot of sense,
and it's going to give them a bit of a
head start there on the performance side, when again they
don't have a process or an advisor to help them
drive towards the right active manager.
Speaker 2 (14:28):
If the odds are stacked up against you, and you
know you do have outliers that tend to have lasting power,
like you know Warren Buffett for example, and you know
these outliers, to your point, literally have to turn money away.
Why do you think people even bother to try and
outperform the market? And I guess part of that question
too is because you guys also run active strategies. You
mentioned that earlier on, So why do you guys even bother?
Speaker 5 (14:50):
Yeah, Vanguard absolutely believes inactive and at the intro I
mentioned if Vanguard doesn't want to be thought of as
an index manager, we want to be thought of as
a low cost manager. And one of the keys to
getting performance after fees right for an active manager is cost.
Speaker 3 (15:08):
And all investors.
Speaker 5 (15:10):
So active and index you know they've got cost of
dealing in the market. I think management fees, salaries, bit
ass spreads, commissions, market impact and taxes. Those costs can
be high and they absolutely reduce investor returns over time.
So you know, that's a hurdle, and if you're an
(15:30):
active manager, you've got to overcome that hurdle to deliver
alpha after costs. And again, the higher the cost of active,
the higher that hurdle.
Speaker 3 (15:41):
And you can turn a great.
Speaker 5 (15:42):
Active manager, a brilliant active manager into a bad one
simply by raising their fees up too high. So as
we think about bringing active and passive together, getting the
cost right and getting a talented manager are absolutely key
on the active side.
Speaker 2 (15:58):
That's a good point from an internal perspective. Is it
more expensive to run an active operation that it does
at passive? For example?
Speaker 5 (16:07):
Yeah, it is certainly more costly to run active than index.
And again, if you think about salaries, analysts, data, research,
information to feed that to get that edge on the
active side, there's a lot of inputs you need to.
Speaker 3 (16:25):
Have an edge over the market.
Speaker 2 (16:27):
What's the edge though, I mean, we just came from
an exchange there where over time the edge disappears.
Speaker 3 (16:35):
It does.
Speaker 5 (16:35):
David and I have been doing some thinking with the
team here and looking at professionalization of the market and
see some interesting things there with manager skill. And basically,
as I talk about professionalization, I want to explain something
to the listeners. If we were to break up the
market into two camps, let's say professionals think mutual funds,
(16:59):
hedge funds, ETF providers.
Speaker 3 (17:02):
Index managers. Those are your pros, and then.
Speaker 5 (17:05):
You've got your non pros, think retail managers, ordinary people
punting and picking stocks. It's important to remember the financial
markets and the equity markets, this is a zero sum game,
so there's no natural source of alpha out there, and
for investor A to be above average, investor B needs
to be below average, and the total outperformance of the
(17:27):
winners must equal the total outperformance of the losers. So
with that in mind, when investing, it's really important to
know who you're trading against. And you got to ask
yourself the question like who's on the other side of
my trade, and why do I think I have some
sort of edge over them? And as we've been looking
at some data here in OZ, you know, fifty years
(17:48):
ago our AUSI market and really equity markets around the world,
they were largely non professionals, so a lot of retail
players and professionals were a smaller segment of the market
it and you'll fast forward to today where most major markets,
including all US, they are dominated by pros, and ninety
percent plus of daily turnover in the market is professional
(18:12):
and if we bring in the derivative markets, that number
pushes up.
Speaker 3 (18:15):
To like ninety eight or ninety nine percent.
Speaker 5 (18:17):
And what's happening there is increasingly the amateurs are shifting
to professional funds and index funds and the easy money
or the somewhat of a mean term here, but willing losers.
Speaker 3 (18:29):
They're dropping out of the market.
Speaker 5 (18:31):
And in essence, the UH active is getting harder every
year because the market is now dominated by professional investors.
And again the big problem for active investors is at
edge like it's pros versus pros, and the markets are
getting more efficient and they're getting harder.
Speaker 1 (18:51):
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Speaker 2 (19:08):
The late great Charlie Munger and one of those annual meetings,
of course, he said all he has to do is,
and I'm paraphrasing outperform idiots, and he said, thank God
that the world is full of them, and I just
have to be somewhat just half a step ahead of idiots.
So how do I develop skill? From an organizational perspective,
(19:28):
you know, from a recruitment perspective, who is a skilled
manager and coming up for up and coming fund managers?
How do I develop that skill? What is the north
star for that?
Speaker 3 (19:38):
Yeah? You know, David, I love the angle of that question.
Speaker 5 (19:42):
Might break up skill into kind of two dimensions and
think about absolute skill and relative skill and absolute skill,
I think, is where your questions going.
Speaker 3 (19:52):
And man, it has never been better.
Speaker 5 (19:54):
And active managers of today they've got CFAs, PhDs, Bloomberg's
data feeds, accounting info, AI, machine learning, better systems, algorithms,
And we talked about performance earlier. I'm like, why aren't
the active managers doing better with all that skill.
Speaker 3 (20:12):
And all that technology And a bit of a paradox here, and.
Speaker 5 (20:18):
The answer is in relative skill, And we were just
talking about absolute skill. If we look at relative skill,
the spread of skill among market participants, kind of going
back to the professionals and the non professionals, that has
really narrowed over the years and over the decades, and
all investors today are a whole lot smarter and asset
(20:39):
management again largely professionalized. A lot of those non pros
have turned to indexing and pros for better results, and
the variance in the skill set of market participants has really.
Speaker 3 (20:51):
Dropped, and that matters again.
Speaker 5 (20:54):
What active managers want are weaker players introduced back into
the market so they can express their skill. And you know,
as I talked to clients about this, I'd love to
use an analogy. It kind of reminds me of my
friendly neighborhood poker game, and we get.
Speaker 3 (21:09):
Players in there of varying skills.
Speaker 5 (21:13):
The newbies, the ones that aren't educated, aren't sophisticated in
playing poker. They get knocked out pretty early. They hand
over their cash, they eat some snacks, and they're out
of the game. But you know, come midnight or one o'clock,
it's all the card sharps and the game gets harder
as the evening progresses, and it's like midnight or one
(21:33):
pm in the markets these days. Again, it is largely
professionalized and the game is just getting harder there. So, yeah,
those are some thoughts on skills. And you know, we'll say,
if we had time machine and we could go back
into the seventies with today's skill set.
Speaker 3 (21:48):
Any of the managers of today would absolutely kill it.
Speaker 5 (21:51):
But it's the again as a paradox on the skill side,
we can't just look at absolute skill. We need to
think about relative skill. And as markets grown more and
more professionalized, that's just one of the reason why indexing
is looking more and more attractive to investors and particularly
novice investors.
Speaker 4 (22:09):
I think another thing that's helped is that the cost
of active investing has come down significantly. So this year alone,
active ETFs AUM has surpassed one trillion dollars in assets.
And Eric Balchunez, who's interviewed John Boglan, has a book
called The Vogel Effect. They talk about the rise of
indexing and what's happened, and one of the things he
(22:30):
discovered was that for active to succeed, you either have
to be really expensive or really cheap. And I think
to your point, Dunk and a lot of investors now
are much more educated that the average retail person knows
a lot more about active funds, whether that's passive active,
and they can pick and choose. And in some of
our previous podcasts episodes on Tiger Money, we interviewed Mark
Mobius and one things he said, was you know he's
(22:52):
launching a new fund that because it's so competitive, he's
waiving the fees with that in mind, you know, feed compression,
active rising, you know, passive as a whole indexing. Where
do you think the future of investing is going in?
Speaker 3 (23:04):
What's next?
Speaker 5 (23:05):
So on the future side again, I see this index
revolution coming to Australia in Asia pac in a bigger
way and it was somewhat eye popping as to the
growth in AM in the space and some status are
I just pulled from our cap markets team, roughly thirty
percent of all ETFAM is in the sector and thematic space.
(23:30):
And we looked at launches and just about forty percent
of ETF launches in Australia last year, about twenty seven
out of sixty four launches, we're in the sector or
thematic space.
Speaker 3 (23:40):
And the allure.
Speaker 5 (23:41):
There is obvious, like these products capture some really exciting themes,
you know, they dominate headlines and shape our future. I'm
thinking blockchain, electric vehicles, solar and AI things of that nature.
And these products, these ETF sector funds provide a targeted
way for investors to place a bet and there's just
(24:02):
an intoxicating combination of FOMO, some compelling narrative and hope
involved there. But I've actually got some concerns about it.
And what's worrying me is some performance chasing behavior we
see with those products. And the good people over at
morning Star put out a survey every year called Mind
(24:24):
the Gap, and what they do with that report is
they look at the gap between reported fund and ETF
returns and actual investor returns in those products, and there's
a material difference between the two and it's attributable to
poor timing from investors. And what really attracted my attention
(24:46):
in this last cut of morning Stars report was they
stratified this impact across segments of the market and sector,
and thematics stood out as a real laggard in the report,
and I think it was looking at US data, but
for the last ten years, it was showing that investors
in thematic and sector ETFs and products were on average
(25:11):
earning two point six percent less than the benchmark of
those funds, which was a staggering number to me. And
again I'll bring that back to performance chasing. So a
bit of a concern there as investors pile in on
the back of some big moves in those sector and
thematic ETFs. You know, as soon as you get the
(25:32):
first sign of troubles or a bit of a shakeout,
investors are cutting their losses there and onto the next
sexy new theme.
Speaker 3 (25:39):
And what you end up with is that that buy
high sell low pattern.
Speaker 5 (25:43):
And again you think about investor returns and you know,
are they getting the full index return? That's that's advertising
some of these products, and you know trends and stuff
we've got an eye on down here in Australia, that's
certainly one of them. And as I bring that back
to the theme of the day and the power of
indexing is we bump into clients that are perhaps struggling
(26:05):
with that or have in the past, steering them towards benchmarks.
With broader exposure, you know, they're they're going to pick
up that market return, there's going to be less volatility
in there, going to be more likely to hang on
to those products during periods of market strife.
Speaker 2 (26:23):
Yeah, I'm glad you brought it up, because it's a
good opportunity to hear from someone like Vanguard, for example,
to clear up some of the I guess misconceptions. If
I could frame it that way. I want to get
your thoughts on this. Do you think indexing exacerbates concentration risk?
Speaker 3 (26:37):
I am glad you raised that question.
Speaker 5 (26:39):
David was hoping we get to that one today and
they think about criticisms of indexing, that's probably the number
one item cited there. And what the critics are really
getting after is they're worried about price setting in the
markets and whether it's concentration risk and a handful of names.
When think about concerns of passive investment dominating the market
(27:04):
and having a big impact, they're a little early with
that call, quite frankly, and important for the listeners to
remember that passive funds we buy and hold stocks because
they're in our benchmark versus active managers. They're looking for
overvalued and undervalued stocks and to express their views. So
active provides a hugely valuable service in price discovery. They're
(27:27):
helping keep stock prices near their fair value. And as
passive grows, what we all need to remember is that
it's trading and not aum that drives price discovery in
the markets. And that's really important because passive is a
low turnover strategy. Something in the order of ten to
(27:48):
twenty percent a year on the index side. Over in
the active camp, that's fifty to one hundred percent a
year turnover on average. So the turnover ratio there is
roughly one to five. And if I were to look
at passive share in Australia today, we're south of twenty
five percent, and you know that leaves seventy five percent.
Speaker 3 (28:08):
Of the market active.
Speaker 5 (28:11):
We've still got plenty of active players in the market
to drive price discovery and set prices. And if we
were to take a really stylized, simplified example and think
about a situation where passive grows to fifty to fifty
in Australia, you know, half index share half active share.
In that scenario, we'd still have trading dominated by active again,
(28:33):
back to that five to one ratio. So understand the concern.
But the naysayers are very early with this call, and
indexing still has a ton of room to grow before
that becomes a valid concern.
Speaker 2 (28:46):
Yeah, well, willing payers, but unknowing losers. As we alluded
to earlier on just the other misconception that I think
keeps coming up, just to use your analogy, that the
professional game has come so far the level of skill
in the market get absolute and relative to the seventies,
has gone grown by leaps and bounds. That you know,
your analogy of the poker game is perfect. At eight
(29:08):
pm you have a wider group, the average is lower.
By the time you get to twelve midnight, you have
just a handful of the very good players at the table.
By two am, it's just a big fish. Really, correct
me if I'm wrong. You just brought up something very
important as well, that you guys at Vanguard are trying
do give an avenue for the smaller players to come
in and be able to I guess to somebody said
(29:30):
level the playing field. Is that a good way of
describing you know that on ramp that you guys are
providing for the retail investor to just level up their
game as well.
Speaker 3 (29:38):
That's it. I think you nailed it, David.
Speaker 5 (29:40):
And you know, if we were an oversimplified example here,
but if we were to break up investors into two groups,
and if you have an average investor with no real
drive to understand the markets really well and a process
to pick an active manager, they probably should be starting
with one hundred percent and index in their portfolio, and
(30:01):
they potentially they could add some active satellites in a
very small manner, but jump to the other camp. If
you really understand the markets, you're a sophisticated investor, or
you have an advisor with a process in an approach
for pickning active there. I also want to call out David,
those investors would be well suited to place the core
(30:23):
of their portfolio in an index total market framework and
then around the margins in the satellites take some really
targeted active bets, and so certainly don't want to say
all investors should be indexed. I think again, there is
a place for active. There are really talented active managers
(30:44):
out there that price their services appropriately. And again, blending
those two a core satellite strategy for the sophisticated end
of town really can work, and you're back to novices
just looking to get a start. You know, I'm not
an advisor, but the only advice I ever feel comfortable
sharing with people when they ask me is look at
(31:05):
index funds ETFs, broadly diversified total market exposures. Dollar cost
your average dollar cost averager way into those positions over ten,
twenty thirty years, forget about them until you retire, and
as we think about setting up investors for buying a home, education,
(31:25):
or their retirement.
Speaker 3 (31:27):
Again, that's a winning strategy.
Speaker 5 (31:29):
That's a great place for the everyday investors to start.
Speaker 4 (31:33):
The power of compounding is very powerful. So Duncan you
were previously a portfolio manager, Cio, what do you hold
in your personal portfolio?
Speaker 3 (31:44):
Yeah, so.
Speaker 5 (31:47):
My friends and family are always shocked when I lift
the lid on my personal account. I eat what I
bake here at Vanguard. It all comes back to performance
and you mentioned compound there, Rebecca. Yeah, when I think
about what I'm trying to do with my portfolio, it's
almost like a strategic mediocrity approach to investing. Acid allocation
(32:10):
decisions I'm making today, getting the balance of stock and
bonds right in the core of my portfolio. It's what
I can stick with and capturing those market returns, those
average returns over a long period of time. That compounding
is really where the magic happens. So again, I firmly
believe indexing is the simplest way to invest, is actually
(32:31):
one of the smartest way to invest. And for me,
it all comes back to performance. So that's home base
for me in the personal account.
Speaker 2 (32:39):
What would that be the same advice you would give
your younger professional self.
Speaker 5 (32:43):
Absolutely, I wish somebody had given me that advice when
I was much younger. David, I've made a lot of
mistakes in my early days. I started out my career
in investment banking, spend a bit of time on the
active side of things, and it took me a long
time to mature in my thinking and my understanding of
what it means to do well in this market. And again,
(33:08):
I think with indexing, you don't just get average performance.
The average investor does worse than the market. And again
because of costs and other mistakes we've talked about, like
performance chasing. So if you can get the whole market
return or close to it, you're going to be an
above average investor, and in a lot of cases you're
going to be a top quartile investor. So yeah, in
(33:31):
terms of advice, that is absolutely where i'd steer it.
Speaker 3 (33:34):
The young investors today.
Speaker 5 (33:36):
Avoid that lottery or that speculation mindset, and you avoid
performance chasing.
Speaker 3 (33:43):
The compounding is where it's at.
Speaker 5 (33:45):
Average returns for an above average period of time leads
to magic results.
Speaker 4 (33:50):
So start early and go broad based, index based. All right,
last question, favorite ETF.
Speaker 3 (33:55):
That's not a Vanguard ticker favorite.
Speaker 2 (33:58):
Yeah, and do you own that in your personal portfolio?
Speaker 5 (34:02):
You know, I got to be totally honest, all Vanguard
in my portfolio.
Speaker 4 (34:07):
And no Hot Sauce or satellite position. Thematics that you mentioned.
Speaker 5 (34:12):
I will share a slight value tilt. So Vanguard has
a value fund. I've been sitting on that position for
close to five years. Yeah, ninety five percent index core
with a touch of hot sauce, if you will, Rebecca,
that would be a value tilt in a small position.
But yeah, nothing exciting there. It's a Vanguard product, and
(34:34):
I will say it hasn't performed with the market the
last five years.
Speaker 3 (34:39):
But I'm okay with that. And as I think about.
Speaker 5 (34:41):
Building my portfolio, I don't want to be jumping from
one hot sauce product to another. I think again, over
the longer term, that value play may pay out, but
I'm ready to sit on that thing for another five
another ten years. And again, as I think about how
that fits into my overall portfolio, do you want to share that?
Speaker 3 (35:02):
That's absolutely key.
Speaker 4 (35:04):
Thank you so much, Duncan. We've shared a lot of
valuable insights for us today and we're so glad that
you could join Tiger Money today.
Speaker 5 (35:12):
Absolutely a pleasure, Rebecca David, thanks for having me.
Speaker 2 (35:15):
On Duncan fantastic. Let's run this back at some points,
hopefully in the not too distant future. So all our
listeners out there, thank you for blessing us with your
time and your presence and listening to Tiger Money, your
Bloomberg podcast about investing funds and financial markets in Asia.
Then all to be hones. If you like what you hear,
don't forget to subscribe to listen, and of course to
(35:36):
share with friends and family. Until next time, you can
find us on the Bloomberg terminal on LinkedIn. We look
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Speaker 2 (00:17):
Good morning, good afternoon, good evening, and good night's wherever
in this vast little blue planets you're joining us from
Welcome to Tiger Money, a Bloomberg podcast about all things
investing with a twist on exchange traded funds in the
Asia Pacific and beyond. I'm David Ingless, Chief Markets Editor
for the Asia Pacific at Bloomberg TV.
Speaker 3 (00:35):
I'm Alted, a.
Speaker 2 (00:35):
Host of The China Show, and Michael pilot Is.
Speaker 4 (00:38):
I'm Rebeccason, head of Asia Pacific ETF Research at Bloomberg Intelligence.
This conversation is strictly non confidential. If you like what
you hear, don't forget to subscribe, like and share. We've
all heard about the rise of indexing, but today we're
going to discuss whether index funds and their actively managed
counterparts can sit at the same table without eating each
other's lunch. A few active managers outperform their benchmark so
(01:03):
is there a room on the playing field for both?
And as strange as it sounds, how much to active
and passive fund managers need each other. Let's bring in
Duncan Burns, head of investment management and equity indexing for
Asia Pacific at Vanguard Australia, because more than twenty years
of trading and investment management experience have Tanum a thing
or two. Besides being an investor, he's also an added cycler. Duncan,
(01:25):
Welcome to Tiger Money.
Speaker 3 (01:27):
Pleasure to be here, David Bega, I've been looking forward.
Speaker 2 (01:29):
To this, Yeah, Duncan twenty years, so you'd be in
probably the perfect position to tell us how things have
evolved and where things are probably headed. Let me just
start by asking what have you guys been busy with?
What's taking up most of your mind space?
Speaker 5 (01:43):
Yes, maybe I'll just touch on what Vanguard's doing in
the region here, and you're looking at Vanguard by the
numbers globally, we're looking after fourteen trillion auarsie dollars on
behalf of fifty plus million mom and dad investors. And
while I've been a Vanguard for some ten years, I
(02:03):
still find those figures amazing. But We absolutely never lose
sight of the fact that that's all client money and
we're just looking after it for him. Zeroing in on
our APAC operation, we're looking after a trillion Ausie dollars
across fourteen markets. Here and Melbourne, Australia is Vanguard's APAC hub.
We have two other hubs London looking after Europe, and
(02:27):
we've got Malvern, Pennsylvania just outside Philadelphia looking after the Americas.
And again our Aussie based investment team. We got about
fifty five strong portfolio managers, traders, risk analysts and economists
and they are driving Vanguard's money management operation and some
(02:47):
thought leadership here in the region. And in terms of
what we're up to, we're largely index focused in the region.
We're bringing that to market through a personal investor offering,
and that's retail through an advisor offering. And our newest
launch is Vanguard Super And a lot of clients think
(03:09):
of us as just an index manager, but as we
kick off here, I want to share about three quarters
of Vanguard's AM is in the index space, but roughly
a quarter is in the active space, so we don't
want to be thought of as just an index manager.
We like to think of ourselves as a low cost manager.
Speaker 4 (03:27):
So speaking of low costs, Vanguard is known to be
one of the cheapest ETF and passive provider. For instance,
your average expense ratio is only eighteen basis points compared
to Blackrock iheres which is thirty two. So you guys
are definitely one of the cheapest in terms of you know,
you mentioned active and passive. We've heard a lot about
active not performing. In one of our recent podcasts, we
(03:48):
had Mark Mobius and Dan Draper, who's the CEO of
S and P five hundred, and he said that ninety
percent of fund managers don't beat their benchmark. And so
now when we talk about the rise of indexing, Bloomberg
Intelligence has a prediction that ETFs will reach thirty five
trillion US dollars by twenty thirty five. And so can
passive and active really coexist? And what are your thoughts
(04:09):
around the rise of indexing?
Speaker 3 (04:11):
I love that question, Rebecca.
Speaker 5 (04:13):
Before I jump to it, perhaps just defining a few
terms here for the listeners as Vanguard sees them indexing.
If we think of that as strategies that are designed
to match a benchmark and not beat it, and really
most powerful when we're targeting a total market portfolio. Indexing
(04:33):
is synonymous with passive, So not a fan of the
name passive. Hopefully that's the only time I say it
here during the session, but you may hear those terms
used interchangeably. That's index and passive and active, so active investing.
I think of that as really anyone who's looking to
outperform the market, and think about stock selection or market
(04:57):
timing based approaches, jumping in and out of the market,
picking individual stocks. And lastly ETF or exchange traded fund
and I think of those as kind of the offspring
of index funds or index funds two point zero and
ETFs are a rapper.
Speaker 3 (05:14):
You can put anything in them.
Speaker 5 (05:15):
These days, but the vast majority of AM and you
know that's really focused on total market ETFs. With that understanding,
I'll circle around to your question, Rebecca, why does Vanguard
believe in in indexing?
Speaker 3 (05:29):
Is there room for active and indexing?
Speaker 5 (05:33):
And I'll say there absolutely is room for both, and
I'd love to drill into cost shortly, but the key
is getting costs right on both sides of that. But
you know, as we look at the landscape today and
we look at the index revolution as it's taking shape
around the world. It's moving at different paces, and US
(05:53):
is leading the charge. They're just approaching fifty percent passive share,
so it's fifty percent passive, fifty percent active in funds
and ETFs. Europe see somewhere in the range of thirty
to forty percent, and Asia pac In Australia we're bringing
up the end.
Speaker 3 (06:09):
Of that train.
Speaker 5 (06:10):
We're not even through twenty five percent here in Australia.
So index revolution absolutely playing out, but we've got a
lot more growth ahead of us here in Australia and
in Asia in particular. What would you both say if
I told you that all the investors are throwing away
billions of dollars a year, and this isn't something that's
(06:31):
just started. It's been going on for about ten years
or so. You know, those are some eye popping numbers.
But the fact is a lot of investors are paying
for something that simply cannot be delivered. And as I
look at the active landscape, but a lot of investors
paying for the promise of active outperformance. And as we've
(06:53):
done some studies and looked at things here in ows
recently across a few different aspects of the market. Love
to delve into that and kind of the why behind
indexing working. But yeah, the index revolution is playing out
globally and locally, and what we see here as a
(07:13):
trend is the smart money and the serious money is
moving the core of their portfolio over to that index
total market exposure. And in terms of what's behind that shift,
if there's one key driver, it comes down to performance,
and there's a performance edge of index overactive.
Speaker 4 (07:33):
I think one of the things that's unique about Asia
is the fragmentation that you have. So to your point,
you know, Australian investors are very different to Chinese investors,
and one of the things that's unique about the Australian
market is you're the only region that has banned retro
session fees, which are rebates, and I think that's why
you've been able to be so successful in Australia. So
for instance, in other regions, people are still paying distributors
(07:55):
fees to sell a product. And so you mentioned earlier
that you have the Australian can tell us a little
bit more about this and why you guys decided to
get into this.
Speaker 5 (08:05):
Yeah, so our latest launch and a big focus here
for our Australian ra Pac operation has been moving into
the Australian superannuation market and that's the retirement scheme here locally,
and the key driver here or the point on that
business is Vanguard wants to be close to the client.
Speaker 3 (08:24):
We are focused on retail clients.
Speaker 5 (08:27):
And over the years we've probably moved a little bit
out of institutional to really point at that sector of
the market. And Vanguard's mission is to take a stand
for all investors, treat them fairly and give them the
best chance for investment success. And as we move into
the super space, we're looking to bring the power of
indexing into super and really drive some fantastic client outcomes
(08:50):
off the back of that.
Speaker 2 (08:53):
Okay, give us a sense of the skill of your business.
And you mentioned you guys the APAs in Melbourne or Melbourne.
My Aussie friends are going to crucifyd me for that.
But you know, I tried give us a scale of
your operation there relative to the market and where you
want it to be in a couple of years.
Speaker 5 (09:14):
So as we look at at Vanguard's footprint in Australia
and in the Asia Pac region, we very much run
our investment book on a global basis. So I mentioned
those three hubs before, we're passing the book and passing
the trade amongst those three offices.
Speaker 3 (09:31):
So we're we.
Speaker 5 (09:32):
Are in every major market cross equities, bonds, FX and futures,
and we're trading twenty four hours a day, five days
a week. And we use that hubstructure again to reach
into local markets.
Speaker 3 (09:47):
Gives us better.
Speaker 5 (09:47):
Control and helps us lower cost, cut out the middleman.
We do a lot of self trading and as we
zoom in on our APAC operation and what we're looking
after here off our Melbourne desk, fourteen markets, Japan is
the number one. We've got Alls, Hong Kong, China, India
in there as some of the other biggies, and we're
(10:10):
looking after global vanguards investments into that basket of fourteen countries.
Speaker 4 (10:16):
So if we look at the product offering that you
guys have globally, you mentioned the three hubs in Australia,
Europe as well as in the US. Do you find
the product offering an investor appetite different across the region?
Speaker 5 (10:31):
There are some slight nuances, and again I might go
back to the index revolution and the way we see
that playing out our offering in our lineup does look
quite similar around the globe, and we do see investors
gravitating to it early in the US, probably Europe close
(10:52):
behind that, and Australia and Asia bringing up the risk.
We do see the index revolution playing out in a
big way, and hopefully by shining a bit of a
spotlight on that today and some of the benefits around
the power of indexing, we can accelerate that. And Vanguard's
bringing that to market through managed funds and through ETFs
(11:14):
would be the core products that we're putting out to market.
Speaker 2 (11:19):
Yeah, you mentioned a few figures earlier on which really
I guess in many ways underscore the potential for the region.
I think you mentioned twenty five percent for example, versus
say a fifty percent let's just call it penetration rate
of passive in the US. And you know, Rebecca brought
up a very good point as well on there's just
different distribution, say schemes across the region. But I guess
(11:42):
my big picture question to you is is there a
sense of inevitability that we are headed, you know, agnostic
to what markets you're operating, we are headed in that
direction of just more money going into index indexing and
passive and what do you think the future is for
(12:02):
active I'm just wondering where you think we go longer
term and if there's anything we can do with the
change the trajectory.
Speaker 5 (12:08):
You know, I think the key driver behind that, David
has got to be performance, and there are active managers
out there that can and do beat the market. You
have a few brilliant investors buffet, maybe David Swenson at
the Ale Endowment, the late David Swinson, or throw Jim
Simon's over at Renaissance Technologies in that bucket as well,
(12:32):
but they are extreme outliers. And it's not that active
can outperform, it's that on average active can't outperform.
Speaker 3 (12:42):
My friends over at S and P.
Speaker 5 (12:43):
They put out a fantastic piece every year called SPIVA,
which stands for S and P Index versus Active And
what they do with that piece of work is they
compare active managers versus their chosen or their closest benchmark
and the punchline of their work. What really sits with
me is that over the long term, over five ten
twenty year periods, about eighty percent of active managers underperform
(13:08):
their chosen benchmarks. After cost, and I'm a numbers guy, David,
and I bring it back to performance and think about
those probabilities, and think about an investor looking to make
the decision active, passive, or a bit of both. If
they are steering hard towards active, they got to think, hey,
(13:29):
eighty percent, those are my odds of underperforming versus twenty percent.
I'm much smaller twenty percent of outperforming. So I think
that that sticks with me. And I also want to
call out persistence is an important thing to look at
there too. You say, hey, I'm not going to pick
any of those bad managers. I'll just pick some of
the good ones. Are the great ones in that twenty percent.
(13:50):
And as S and P looks at that in their scorecard,
there's a whole lot of turnover in that twenty percent,
and the quantity or the amount of active managers that
can outperform and outperform on a repeated basis, there's something
in the order of two to three percent. So yeah, again,
bringing it back to the odds and where the average
(14:11):
investors should be starting their portfolio and building the core
of their portfolio, indexing just makes a lot of sense,
and it's going to give them a bit of a
head start there on the performance side, when again they
don't have a process or an advisor to help them
drive towards the right active manager.
Speaker 2 (14:28):
If the odds are stacked up against you, and you
know you do have outliers that tend to have lasting power,
like you know Warren Buffett for example, and you know
these outliers, to your point, literally have to turn money away.
Why do you think people even bother to try and
outperform the market? And I guess part of that question
too is because you guys also run active strategies. You
mentioned that earlier on, So why do you guys even bother?
Speaker 5 (14:50):
Yeah, Vanguard absolutely believes inactive and at the intro I
mentioned if Vanguard doesn't want to be thought of as
an index manager, we want to be thought of as
a low cost manager. And one of the keys to
getting performance after fees right for an active manager is cost.
Speaker 3 (15:08):
And all investors.
Speaker 5 (15:10):
So active and index you know they've got cost of
dealing in the market. I think management fees, salaries, bit
ass spreads, commissions, market impact and taxes. Those costs can
be high and they absolutely reduce investor returns over time.
So you know, that's a hurdle, and if you're an
(15:30):
active manager, you've got to overcome that hurdle to deliver
alpha after costs. And again, the higher the cost of active,
the higher that hurdle.
Speaker 3 (15:41):
And you can turn a great.
Speaker 5 (15:42):
Active manager, a brilliant active manager into a bad one
simply by raising their fees up too high. So as
we think about bringing active and passive together, getting the
cost right and getting a talented manager are absolutely key
on the active side.
Speaker 2 (15:58):
That's a good point from an internal perspective. Is it
more expensive to run an active operation that it does
at passive? For example?
Speaker 5 (16:07):
Yeah, it is certainly more costly to run active than index.
And again, if you think about salaries, analysts, data, research,
information to feed that to get that edge on the
active side, there's a lot of inputs you need to.
Speaker 3 (16:25):
Have an edge over the market.
Speaker 2 (16:27):
What's the edge though, I mean, we just came from
an exchange there where over time the edge disappears.
Speaker 3 (16:35):
It does.
Speaker 5 (16:35):
David and I have been doing some thinking with the
team here and looking at professionalization of the market and
see some interesting things there with manager skill. And basically,
as I talk about professionalization, I want to explain something
to the listeners. If we were to break up the
market into two camps, let's say professionals think mutual funds,
(16:59):
hedge funds, ETF providers.
Speaker 3 (17:02):
Index managers. Those are your pros, and then.
Speaker 5 (17:05):
You've got your non pros, think retail managers, ordinary people
punting and picking stocks. It's important to remember the financial
markets and the equity markets, this is a zero sum game,
so there's no natural source of alpha out there, and
for investor A to be above average, investor B needs
to be below average, and the total outperformance of the
(17:27):
winners must equal the total outperformance of the losers. So
with that in mind, when investing, it's really important to
know who you're trading against. And you got to ask
yourself the question like who's on the other side of
my trade, and why do I think I have some
sort of edge over them? And as we've been looking
at some data here in OZ, you know, fifty years
(17:48):
ago our AUSI market and really equity markets around the world,
they were largely non professionals, so a lot of retail
players and professionals were a smaller segment of the market
it and you'll fast forward to today where most major markets,
including all US, they are dominated by pros, and ninety
percent plus of daily turnover in the market is professional
(18:12):
and if we bring in the derivative markets, that number
pushes up.
Speaker 3 (18:15):
To like ninety eight or ninety nine percent.
Speaker 5 (18:17):
And what's happening there is increasingly the amateurs are shifting
to professional funds and index funds and the easy money
or the somewhat of a mean term here, but willing losers.
Speaker 3 (18:29):
They're dropping out of the market.
Speaker 5 (18:31):
And in essence, the UH active is getting harder every
year because the market is now dominated by professional investors.
And again the big problem for active investors is at
edge like it's pros versus pros, and the markets are
getting more efficient and they're getting harder.
Speaker 1 (18:51):
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Speaker 2 (19:08):
The late great Charlie Munger and one of those annual meetings,
of course, he said all he has to do is,
and I'm paraphrasing outperform idiots, and he said, thank God
that the world is full of them, and I just
have to be somewhat just half a step ahead of idiots.
So how do I develop skill? From an organizational perspective,
(19:28):
you know, from a recruitment perspective, who is a skilled
manager and coming up for up and coming fund managers?
How do I develop that skill? What is the north
star for that?
Speaker 3 (19:38):
Yeah? You know, David, I love the angle of that question.
Speaker 5 (19:42):
Might break up skill into kind of two dimensions and
think about absolute skill and relative skill and absolute skill,
I think, is where your questions going.
Speaker 3 (19:52):
And man, it has never been better.
Speaker 5 (19:54):
And active managers of today they've got CFAs, PhDs, Bloomberg's
data feeds, accounting info, AI, machine learning, better systems, algorithms,
And we talked about performance earlier. I'm like, why aren't
the active managers doing better with all that skill.
Speaker 3 (20:12):
And all that technology And a bit of a paradox here, and.
Speaker 5 (20:18):
The answer is in relative skill, And we were just
talking about absolute skill. If we look at relative skill,
the spread of skill among market participants, kind of going
back to the professionals and the non professionals, that has
really narrowed over the years and over the decades, and
all investors today are a whole lot smarter and asset
(20:39):
management again largely professionalized. A lot of those non pros
have turned to indexing and pros for better results, and
the variance in the skill set of market participants has really.
Speaker 3 (20:51):
Dropped, and that matters again.
Speaker 5 (20:54):
What active managers want are weaker players introduced back into
the market so they can express their skill. And you know,
as I talked to clients about this, I'd love to
use an analogy. It kind of reminds me of my
friendly neighborhood poker game, and we get.
Speaker 3 (21:09):
Players in there of varying skills.
Speaker 5 (21:13):
The newbies, the ones that aren't educated, aren't sophisticated in
playing poker. They get knocked out pretty early. They hand
over their cash, they eat some snacks, and they're out
of the game. But you know, come midnight or one o'clock,
it's all the card sharps and the game gets harder
as the evening progresses, and it's like midnight or one
(21:33):
pm in the markets these days. Again, it is largely
professionalized and the game is just getting harder there. So, yeah,
those are some thoughts on skills. And you know, we'll say,
if we had time machine and we could go back
into the seventies with today's skill set.
Speaker 3 (21:48):
Any of the managers of today would absolutely kill it.
Speaker 5 (21:51):
But it's the again as a paradox on the skill side,
we can't just look at absolute skill. We need to
think about relative skill. And as markets grown more and
more professionalized, that's just one of the reason why indexing
is looking more and more attractive to investors and particularly
novice investors.
Speaker 4 (22:09):
I think another thing that's helped is that the cost
of active investing has come down significantly. So this year alone,
active ETFs AUM has surpassed one trillion dollars in assets.
And Eric Balchunez, who's interviewed John Boglan, has a book
called The Vogel Effect. They talk about the rise of
indexing and what's happened, and one of the things he
(22:30):
discovered was that for active to succeed, you either have
to be really expensive or really cheap. And I think
to your point, Dunk and a lot of investors now
are much more educated that the average retail person knows
a lot more about active funds, whether that's passive active,
and they can pick and choose. And in some of
our previous podcasts episodes on Tiger Money, we interviewed Mark
Mobius and one things he said, was you know he's
(22:52):
launching a new fund that because it's so competitive, he's
waiving the fees with that in mind, you know, feed compression,
active rising, you know, passive as a whole indexing. Where
do you think the future of investing is going in?
Speaker 3 (23:04):
What's next?
Speaker 5 (23:05):
So on the future side again, I see this index
revolution coming to Australia in Asia pac in a bigger
way and it was somewhat eye popping as to the
growth in AM in the space and some status are
I just pulled from our cap markets team, roughly thirty
percent of all ETFAM is in the sector and thematic space.
(23:30):
And we looked at launches and just about forty percent
of ETF launches in Australia last year, about twenty seven
out of sixty four launches, we're in the sector or
thematic space.
Speaker 3 (23:40):
And the allure.
Speaker 5 (23:41):
There is obvious, like these products capture some really exciting themes,
you know, they dominate headlines and shape our future. I'm
thinking blockchain, electric vehicles, solar and AI things of that nature.
And these products, these ETF sector funds provide a targeted
way for investors to place a bet and there's just
(24:02):
an intoxicating combination of FOMO, some compelling narrative and hope
involved there. But I've actually got some concerns about it.
And what's worrying me is some performance chasing behavior we
see with those products. And the good people over at
morning Star put out a survey every year called Mind
(24:24):
the Gap, and what they do with that report is
they look at the gap between reported fund and ETF
returns and actual investor returns in those products, and there's
a material difference between the two and it's attributable to
poor timing from investors. And what really attracted my attention
(24:46):
in this last cut of morning Stars report was they
stratified this impact across segments of the market and sector,
and thematics stood out as a real laggard in the report,
and I think it was looking at US data, but
for the last ten years, it was showing that investors
in thematic and sector ETFs and products were on average
(25:11):
earning two point six percent less than the benchmark of
those funds, which was a staggering number to me. And
again I'll bring that back to performance chasing. So a
bit of a concern there as investors pile in on
the back of some big moves in those sector and
thematic ETFs. You know, as soon as you get the
(25:32):
first sign of troubles or a bit of a shakeout,
investors are cutting their losses there and onto the next
sexy new theme.
Speaker 3 (25:39):
And what you end up with is that that buy
high sell low pattern.
Speaker 5 (25:43):
And again you think about investor returns and you know,
are they getting the full index return? That's that's advertising
some of these products, and you know trends and stuff
we've got an eye on down here in Australia, that's
certainly one of them. And as I bring that back
to the theme of the day and the power of
indexing is we bump into clients that are perhaps struggling
(26:05):
with that or have in the past, steering them towards benchmarks.
With broader exposure, you know, they're they're going to pick
up that market return, there's going to be less volatility
in there, going to be more likely to hang on
to those products during periods of market strife.
Speaker 2 (26:23):
Yeah, I'm glad you brought it up, because it's a
good opportunity to hear from someone like Vanguard, for example,
to clear up some of the I guess misconceptions. If
I could frame it that way. I want to get
your thoughts on this. Do you think indexing exacerbates concentration risk?
Speaker 3 (26:37):
I am glad you raised that question.
Speaker 5 (26:39):
David was hoping we get to that one today and
they think about criticisms of indexing, that's probably the number
one item cited there. And what the critics are really
getting after is they're worried about price setting in the
markets and whether it's concentration risk and a handful of names.
When think about concerns of passive investment dominating the market
(27:04):
and having a big impact, they're a little early with
that call, quite frankly, and important for the listeners to
remember that passive funds we buy and hold stocks because
they're in our benchmark versus active managers. They're looking for
overvalued and undervalued stocks and to express their views. So
active provides a hugely valuable service in price discovery. They're
(27:27):
helping keep stock prices near their fair value. And as
passive grows, what we all need to remember is that
it's trading and not aum that drives price discovery in
the markets. And that's really important because passive is a
low turnover strategy. Something in the order of ten to
(27:48):
twenty percent a year on the index side. Over in
the active camp, that's fifty to one hundred percent a
year turnover on average. So the turnover ratio there is
roughly one to five. And if I were to look
at passive share in Australia today, we're south of twenty
five percent, and you know that leaves seventy five percent.
Speaker 3 (28:08):
Of the market active.
Speaker 5 (28:11):
We've still got plenty of active players in the market
to drive price discovery and set prices. And if we
were to take a really stylized, simplified example and think
about a situation where passive grows to fifty to fifty
in Australia, you know, half index share half active share.
In that scenario, we'd still have trading dominated by active again,
(28:33):
back to that five to one ratio. So understand the concern.
But the naysayers are very early with this call, and
indexing still has a ton of room to grow before
that becomes a valid concern.
Speaker 2 (28:46):
Yeah, well, willing payers, but unknowing losers. As we alluded
to earlier on just the other misconception that I think
keeps coming up, just to use your analogy, that the
professional game has come so far the level of skill
in the market get absolute and relative to the seventies,
has gone grown by leaps and bounds. That you know,
your analogy of the poker game is perfect. At eight
(29:08):
pm you have a wider group, the average is lower.
By the time you get to twelve midnight, you have
just a handful of the very good players at the table.
By two am, it's just a big fish. Really, correct
me if I'm wrong. You just brought up something very
important as well, that you guys at Vanguard are trying
do give an avenue for the smaller players to come
in and be able to I guess to somebody said
(29:30):
level the playing field. Is that a good way of
describing you know that on ramp that you guys are
providing for the retail investor to just level up their
game as well.
Speaker 3 (29:38):
That's it. I think you nailed it, David.
Speaker 5 (29:40):
And you know, if we were an oversimplified example here,
but if we were to break up investors into two groups,
and if you have an average investor with no real
drive to understand the markets really well and a process
to pick an active manager, they probably should be starting
with one hundred percent and index in their portfolio, and
(30:01):
they potentially they could add some active satellites in a
very small manner, but jump to the other camp. If
you really understand the markets, you're a sophisticated investor, or
you have an advisor with a process in an approach
for pickning active there. I also want to call out David,
those investors would be well suited to place the core
(30:23):
of their portfolio in an index total market framework and
then around the margins in the satellites take some really
targeted active bets, and so certainly don't want to say
all investors should be indexed. I think again, there is
a place for active. There are really talented active managers
(30:44):
out there that price their services appropriately. And again, blending
those two a core satellite strategy for the sophisticated end
of town really can work, and you're back to novices
just looking to get a start. You know, I'm not
an advisor, but the only advice I ever feel comfortable
sharing with people when they ask me is look at
(31:05):
index funds ETFs, broadly diversified total market exposures. Dollar cost
your average dollar cost averager way into those positions over ten,
twenty thirty years, forget about them until you retire, and
as we think about setting up investors for buying a home, education,
(31:25):
or their retirement.
Speaker 3 (31:27):
Again, that's a winning strategy.
Speaker 5 (31:29):
That's a great place for the everyday investors to start.
Speaker 4 (31:33):
The power of compounding is very powerful. So Duncan you
were previously a portfolio manager, Cio, what do you hold
in your personal portfolio?
Speaker 3 (31:44):
Yeah, so.
Speaker 5 (31:47):
My friends and family are always shocked when I lift
the lid on my personal account. I eat what I
bake here at Vanguard. It all comes back to performance
and you mentioned compound there, Rebecca. Yeah, when I think
about what I'm trying to do with my portfolio, it's
almost like a strategic mediocrity approach to investing. Acid allocation
(32:10):
decisions I'm making today, getting the balance of stock and
bonds right in the core of my portfolio. It's what
I can stick with and capturing those market returns, those
average returns over a long period of time. That compounding
is really where the magic happens. So again, I firmly
believe indexing is the simplest way to invest, is actually
(32:31):
one of the smartest way to invest. And for me,
it all comes back to performance. So that's home base
for me in the personal account.
Speaker 2 (32:39):
What would that be the same advice you would give
your younger professional self.
Speaker 5 (32:43):
Absolutely, I wish somebody had given me that advice when
I was much younger. David, I've made a lot of
mistakes in my early days. I started out my career
in investment banking, spend a bit of time on the
active side of things, and it took me a long
time to mature in my thinking and my understanding of
what it means to do well in this market. And again,
(33:08):
I think with indexing, you don't just get average performance.
The average investor does worse than the market. And again
because of costs and other mistakes we've talked about, like
performance chasing. So if you can get the whole market
return or close to it, you're going to be an
above average investor, and in a lot of cases you're
going to be a top quartile investor. So yeah, in
(33:31):
terms of advice, that is absolutely where i'd steer it.
Speaker 3 (33:34):
The young investors today.
Speaker 5 (33:36):
Avoid that lottery or that speculation mindset, and you avoid
performance chasing.
Speaker 3 (33:43):
The compounding is where it's at.
Speaker 5 (33:45):
Average returns for an above average period of time leads
to magic results.
Speaker 4 (33:50):
So start early and go broad based, index based. All right,
last question, favorite ETF.
Speaker 3 (33:55):
That's not a Vanguard ticker favorite.
Speaker 2 (33:58):
Yeah, and do you own that in your personal portfolio?
Speaker 5 (34:02):
You know, I got to be totally honest, all Vanguard
in my portfolio.
Speaker 4 (34:07):
And no Hot Sauce or satellite position. Thematics that you mentioned.
Speaker 5 (34:12):
I will share a slight value tilt. So Vanguard has
a value fund. I've been sitting on that position for
close to five years. Yeah, ninety five percent index core
with a touch of hot sauce, if you will, Rebecca,
that would be a value tilt in a small position.
But yeah, nothing exciting there. It's a Vanguard product, and
(34:34):
I will say it hasn't performed with the market the
last five years.
Speaker 3 (34:39):
But I'm okay with that. And as I think about.
Speaker 5 (34:41):
Building my portfolio, I don't want to be jumping from
one hot sauce product to another. I think again, over
the longer term, that value play may pay out, but
I'm ready to sit on that thing for another five
another ten years. And again, as I think about how
that fits into my overall portfolio, do you want to share that?
Speaker 3 (35:02):
That's absolutely key.
Speaker 4 (35:04):
Thank you so much, Duncan. We've shared a lot of
valuable insights for us today and we're so glad that
you could join Tiger Money today.
Speaker 5 (35:12):
Absolutely a pleasure, Rebecca David, thanks for having me.
Speaker 2 (35:15):
On Duncan fantastic. Let's run this back at some points,
hopefully in the not too distant future. So all our
listeners out there, thank you for blessing us with your
time and your presence and listening to Tiger Money, your
Bloomberg podcast about investing funds and financial markets in Asia.
Then all to be hones. If you like what you hear,
don't forget to subscribe to listen, and of course to
(35:36):
share with friends and family. Until next time, you can
find us on the Bloomberg terminal on LinkedIn. We look
forward to hearing from all of you. This podcast was
produced by CLERICSHP
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